Chicago Launches First City Infrastructure Trust in the US

Financing energy efficiency is both a tricky business and a no-brainer. But that's starting to change -- at least in Chicago. On Thursday, the city’s mayor, Rahm Emanuel, announced the Chicago Infrastructure Trust, which will leverage private investment for retrofits pending City Council approval.

For the Trust’s first project, Retrofit Chicago, the city of Chicago will work with debt and equity investors to finance $200 million to $225 million in retrofits in municipal buildings, which will reduce the energy consumption in those assets by 20 percent. Currently, the city spends $170 million annually on energy.

“The Chicago Infrastructure Trust will bring additional resources to stimulate public and private investment in our infrastructure, create thousands of jobs for Chicagoans, and ensure that our residents have a world-class quality of life,” Emanuel said in a statement.

The money will come from five organizations: Citibank, Citi Infrastructure Investors, Macquarie Infrastructure and Real Assets Inc., J.P. Morgan Asset Management Infrastructure Investment Group and Ullico, all of which have agreed to consider the projects the city might undertake. In Thursday’s announcement, the banks indicated an initial investment capacity of more than $1 billion, depending on the projects.

At a session focused on the issue of financing energy efficiency on Wednesday afternoon at the ARPA-E summit, Marshal Salant, managing director and head of alternative energy finance at Citi, said that his organization had been working on how to build the models for each sector, whether commercial, industrial, residential, or municipal-university-schools-hospitals, commonly referred to as the 'MUSH' market. The first project for Chicago is focused on municipal buildings, but future projects could be in commercial or residential markets.

“There are so many flavors of energy efficiency upgrades,” he said. The problem is that “there is no security collateral in lending for energy efficiency.” Salant said Citi was working on building processes and strategies for 11 different models, depending on the project.

Even though novel financing schemes are starting to pop up with increasing frequency, the panel at the conference cited an endless list of barriers, ranging from how to ensure savings from the upgrades to finding a single contractor to do a deep retrofit in a fragmented market.

Once a few cities or states can launch successful projects, however, these non-traditional financing schemes could begin to proliferate. A study from the American Council for an Energy Efficient Economy found that the risk on energy efficiency investment was similar to treasury bills, but with a payback about five times as high.

Citi is also working with Renewable Funding, a company that has helped administer property-assessed clean energy (PACE) financing in different states, to pool together small loans that a city could lend out. Citi would securitize them and put the funds into the bond market. Salant noted it would be the first instance where energy efficiency loans would be securitized and rated for the bond market.

Other locales are working on other solutions. Besides PACE, which is being blocked by mortgage lenders in the residential space, there are solutions like Delaware’s $35 million sustainable energy utility (SEU) fund, a nonprofit that is meant to centralize financing and contracting for retrofits that would be paid back through utility bills.

John Byrne, professor of energy and climate policy at the University of Delaware and co-chairman of SEU, said the group is talking to the U.S. Department of Energy about setting up a pilot scale with a similar system that the market could then take over and finance energy efficiency through bond deals. “I think there’s reason for some hope,” Byrne said.

California is also looking into a version of on-bill financing for energy efficiency upgrades, and the U.K. has a $20 billion program that launches later this year to fund small efficiency upgrades. New York adopted on-bill financing last summer. The Clinton Foundation, which partnered with the Chicago Infrastructure Bank, helped build the framework for Obama’s Better Buildings Initiative, which will provide $4 billion for commercial building energy efficiency retrofits.

The appeal of retrofits is not just a steady payback -- this sector could also provide badly needed jobs. The new project in Chicago is estimated to create about 2,000 jobs. Clinton said at ARPA-E that programs like the one in Chicago are the perfect solution for putting middle-aged, non-college-educated people back to work, but only if there’s institutional support for retrofit programs, rather than just one-off efforts. “The best thing to do is focus on being more systematically effective in energy efficiency,” Clinton said at the ARPA-E summit. “And we are making progress.”